Fiat Currency
Money that holds value because a government maintains it as legal tender. Created and regulated by central banks, fiat currency is used for transactions within the national economy under the domain of its backing government.
Related terms
Currency
Money underpinned by the legal tender system of a particular country or economic area, used as a medium of exchange for goods and services. Paper currency and coins are issued by governments and central banks and usually accepted at face value as payment.
Read full definitionCentral Bank
The monetary authority of a country, such as the Federal Reserve or European Central Bank, with special authority to issue government-backed currency. Central banks formulate monetary policy, regulate member banks and influence exchange rates through interest rate decisions and currency intervention.
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Spot Rate
The current market exchange rate at which one currency can be bought or sold for immediate delivery. Spot trades typically settle two business days later (T+2).
Read full definitionForward Contract
An agreement to exchange a set amount of one currency for another at a fixed rate on a future date. It locks in today’s rate, protecting a business from adverse currency moves before a payment falls due.
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The simultaneous purchase and sale of the same amount of a currency for two different value dates, typically a near leg at spot and a far leg forward. It is used to roll a hedge forward or manage short-term cash-flow timing.
Read full definitionCurrency Pair
Two currencies quoted against each other, such as GBP/USD. The first is the base currency and the second the quote currency; the price shows how much of the quote currency one unit of the base is worth.
Read full definitionBid-Ask Spread
The difference between the price at which the market will buy a currency (bid) and the price at which it will sell (ask). A tighter spread means lower transaction costs.
Read full definitionPip
The smallest standard increment by which a currency pair moves, usually the fourth decimal place (0.0001). Pips are the common unit for quoting spreads and price movements.
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